Series I Savings Bond

The Series I bond was issued first in 1998 by US Treasury with the objective of allowing investors to guard against possible inflation.

Unlike the Series EE bonds, which pay a fixed interest rate until the maturity date (that rate was linked to 5-year Treasury notes until last May), I bonds guarantee a small fixed rate (1% at present) for the lifetime of the bond plus an additional variable part of the rate linked to inflation via the Consumer Price Index. A new indexed rate is announced every 6 months, in May and November. As inflation rises, so does the variable part of the interest rate, or vice versa. Right now, Series I savings bonds are paying a combined annual rate of 6.73%, down from five years ago, but still much better than savings accounts and CD's. By comparison, the current rate of EE savings bonds is only 3.2%.

Here are a few more details: (i) Both bonds can be bought with as little as $50 at most of the banks. (ii) With both type of bonds, the interest is exempt from state and local tax (iii) No penalty on redemption of bond after 5 years (iii) The federal tax on it need not be paid until you redeem the bond and collect the interest. (iv) If you use the bonds to pay college tuition you may not have to pay federal income taxes at all, no matter when you use it.

Weekend Commentary

Political turmoil and violence in oil industries in Nigeria and Saudi Arab drove up oil prices again
(currently at $62.91 a barrel). Treasury prices finished weaker. The benchmark 10-year note ended down 2/32 at 99 13/32 with a yield of 4.5691%. Gold futures also climbed after the Saudi news of violence came out. The front-month contract closed up $6.60 at $554.60 an ounce (This is about 30% gain from May 11 when we advised our readers to accumulate gold).

Probably the tame core-inflation figures released this week or perhaps the confidence of the market on the Fed that it would continue to keep inflation low -- somehow these factors worked together to allow a drop in mortgage rate this week after continuous hike in last four weeks.

According to Freddie Mac's weekly report for this week, the 30-year Fixed mortgage rate was at a national average 6.26%, down from 6.28% a week earlier. Last year at this time the loan averaged 5.69%. The average on the 15-year mortgage also fell to 5.89% from 5.91% last week. A year ago, this rate averaged at 5.22%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.96%, up slightly from last week when it averaged 5.95%. A year ago, the five-year ARM averaged 5.05%. The 1-year Treasury-indexed ARMs averaged 5.32%, down from last week when it averaged 5.36%. The one-year ARM averaged 4.16% at this time last year.

Resurging Europe

"Break out the champagne - Europe to grow faster in 2006,” so says the European Commission (EC).

In a much more upbeat report than any in recent times, the EC projects 2.2% GDP growth for the 25-nation European Union, with the 12-nation, euro-based Eurozone hitting 1.9%, courtesy of beefier corporate profits and higher investment.

Breaking down the individual nations’ growth, Germany finally looks set to hit a more respectable level of expansion at 1.5%. Spain is slated to come out on top at 3.1%. The economies of the UK, France and Italy are forecast to grow 2.4%, 1.9% and 1.3%, respectively.

Wish to invest in Europe? The San Francisco-based firm, Barclays Global Investors (BGI) provides several exchange traded funds (ETFs) based on Index tracking investment markets of several countries: Austria (EWO), Belgium (EWK), European Monetary Union (EZU), France (EWQ), Germany (EWG), Italy (EWI), Netherlands (EWN), Spain (EWP), Sweden (EWD), Switzerland (EWL), United Kingdom (EWU), S&P Europe 350 Index Fund (IEV).

Another way to invest in Europe is through a bucket of American Deposit Receipts of European Companies: BLDRS Europe 100 ADR Index (ADRU) offered by Nasdaq and the Bank of New York.

FDIC-Insured

'FDIC insured' -- this is an imporatnt phrase that we must always check out before we put our cash into any bank in any form. But, as we know, its coverage is upto $100,000. For many of our senior citizens who are already retired or are approaching that soon, this is a problem, if they wish to keep most of their wealth in safe deposits rather than investing in stock market.

Nevertheless, just 60% of our $4.4 trillion in deposits are FDIC- insured today. That's down from 77% of $2.5 trillion in deposits that were insured in 1992. There are a few ways to get more than $100,000 of FDIC insurance coverage on your bank deposits, despite the agency's insurance limits:

(i) Visit http://www.fdic.gov/ or call 1-877-275-3342 to find out how you might obtain more FDIC-coverage by splitting your money into different ownership categories including single accounts, joint accounts, self-directed retirement accounts and revocable trust accounts.

(ii) Visit http://www.cdars.com/. CDARS stands for Central Deposit Account Registry Service, a CD placement service owned by Promontory Interfinancial Network LLC, Arlington, Va. One can get coverage upto $20 million through this program. Through this service, you select a participating bank which arranges to split your deposits among member institutions. You get the rate paid by the bank at which you open the account. Bridge payments are made between that bank and the other participating banks to compensate for any interest-rate discrepancies.

(iii) Some companies -- including The Calvert Group and Merrill Lynch -- automatically provide extra FDIC insurance through specific accounts. The Calvert Group may split-up bank money-market deposit account funds among four participating banks through its"Insured Market Plus" account. This means as much as $400,000 of FDIC insurance per person. Merrill Lynch's "Insured Savings" Account is available through certain types of accounts. Twenty-five banks currently participate in this program.

Mortgage: Rates Up

Testifying before the House Committee on Financial Services yesterday, the new Fed Chairman, Ben Bernanke said that short-term interest rates are "still relatively low" and "some further firming of monetary policy may be necessary." This leaves little doubt in our mind that Fed's Open Market Committee would raise rates by quarter point to 4.75% in their next meeting on March 27-28.

This influenced the increase in mortgage rates this week. According to Freddie Mac's weekly report, the 30-year fixed-rate mortgage increased this week to the highest level of this year -- a national average of 6.28%. A year ago, this rate averaged at 5.62%. The average rate on a 15-year fixed-rate mortgage rose to 5.91% from 5.83% a week ago. Last year at this time, the loan averaged 5.14%.

The 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged 5.95% this week, up from 5.89%. One year ago, this rate averaged at 5.05%. One-year, Treasury-indexed ARMs averaged 5.36%, up slightly from 5.34% last week. A year ago the ARM, which is usually more sensitive to Federal Reserve rate hikes, was at 4.15%. With increasing rate, ARM is really losing its popularity it enjoyed in 2001-2003 [Read our past posting on ARM].

Reverse Mortgage

Reverse Mortgage is a kind of loan that you can get on the equity built up over years of home mortgage payments. It is getting very popular among senior citizens. The money can come back to you in different possible ways: In a one time lump sum, in monthly payments for life or designated length of time or in a credit line that allows the homeowner to decide when and how much they want to be paid. With a reverse mortgage you no longer make monthly payments. For a change, you start receiving them.

Here we present a few important details that are common among all kinds of reverse mortgages:

• Within each program of reverse mortgage, the amount of loan you can get generally depends on your age and your home's value. The older you are and the more your home is worth, the more cash you can get.
• The proceeds from a Reverse Mortgage are Tax-Free.
• You continue to be the owner of your home and remain responsible for paying your property taxes and home-owner insurance and for making property repairs, just like you are with your forward mortgage. Failure to these may lead to termination of your mortgage contract and the lender may impose repayment.
• All reverse mortgages are due and payable when the last surviving borrower dies, sells the home, or permanently moves out of the home, which means that none of the co-borrowers has lived in the home for one continuous year.

3 New State Street ETFs

Last week State Street Global Advisors introduced three exchange-traded funds (ETF) tracking three important sectors: biotechnology, homebuilder and semiconductor. Here are those listed with their respective rivals:

The SPDR Biotech (XBI) will have to compete with Biotech HOLDRS (BBH), iShares Nasdaq Biotech (IBB) and PowerShares Dynamic Biotech & Genome Portfolio (PBE).

The new SPDR Semiconductor (XSD) will face competition from already existing Semiconductor HOLDRS (SMH), iShares Goldman Sachs Semiconductor (IGW), PowerShares Dynamic Semiconductors Portfolio (PSI) .

In the red-hot homebuilder sector, State Street's SPDR Homebuilders (XHB) will have to compete with PowerShares Dynamic Building & Construction Portfolio (PKB) which was launched in October. Additionally, Barclays has filed to create its own ETF designed to follow the home-construction sector.

All these funds have a very low expense ratio of 0.35%.

Mortgage This Week

In absence of any big economic news the mortgage rate drifted slightly upward this week.

According to Freddie Mac's weekly survey, the average for the 30-year fixed mortgage edged up to 6.24% from 6.23% last week. The average for the 15-year fixed mortgage, a popular refinancing choice, also increased to 5.83% from 5.81% last week. One year ago the 30-year mortgage averaged 5.57% while the 15-year rate was at 5.1%.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.89% this week versus 5.87% a week ago. A year ago, the 5-year ARM averaged 4.99%. One-year Treasury-indexed ARMs averaged 5.34%, up from 5.33%. A year ago the loan averaged 4.11%. As we indicated many times, the days of ARM seem to be over and it has started losing its popularity in refinancing market.

Commodity-based ETF

Deutsche Bank has introduced the first commodity-based Exchange Traded Funds (ETFs) which started trading last Friday on the American Stock Exchange. Its ticker symbol is DBC.

The Deutsche Bank Commodity Index Tracking Fund, DBC, isn't technically a true ETF because it's structured as a commodity pool rather than a registered investment company, although it resembles an ETF in many ways. It marks the first time an ETF-like product will use derivatives in its portfolio to provide exposure to commodities. DBC is designed to follow the performance of the Deutsche Bank Liquid Commodity Index - Excess Return, which is based on futures contracts on crude oil, heating oil, gold, aluminum, corn and wheat. The two energy futures will be rolled monthly, and the others annually. Other less-liquid commodities such as coffee, sugar and livestock aren't included in the index. Aside from investing in futures to track the commodities index, the ETF will also hold a portfolio of high-quality bonds.

According to the prospectus, DBC has an expense ratio of 1.5%, which includes a 0.95% management fee. This is quite high as compared to 0.3-o.5% for many index-based funds but the expense ratio is expected to be offset by the yield from the fixed-income portion of the portfolio, which will earn a rate of interest based on the yield on three-month U.S. Treasury bills (currently about 4.27%).

The introductory price of DBC last Friday was $23 and today it finished trading at $23.40.

Tax 2005: Deductions

We will provide tips on Tax 2005 starting with today's posting. Today's topic is 'Deduction'. As many of us know there are two methods of taking deductions: (i) Standard Deduction (ii) Itemizing.

According to the Internal Revenue Service, most taxpayers use the standard deduction. The amount is different for each filing status and is higher for blind taxpayers and those age 65 or older. The amounts are also adjusted for inflation every year. For 2005 returns the standard deductions are:

• $5,000 for single filers or married couples filing separately
• $7,300 for head of household filers
• $10,000 for married couples filing jointly

But those who spend a lot on medical care, mortgage interest, state and local taxes, charitable contributions or a variety of miscellaneous items generally are better off itemizing. Even purchases might help out some filers at tax time this year, thanks to a new deduction for sales taxes paid. When these expenditures exceed the standard deduction, you'll save on your taxes by filling out Schedule A along with your 1040.

If you itemize, there are a few things to remember. First, not every dollar you spend can be subtracted from your income. In the medical category, only expenses that exceed 7.5% of your adjusted gross income can be deducted. You cannot deduct any amount below that. You have to reach a '2% of income' threshold before you can use miscellaneous deductions, such as unreimbursed job expenses and investment and tax-preparation costs. There also are restrictions on how much in casualty losses you can deduct, as well as limits on the deductibility of very large charitable contribution amounts. Second, your overall itemized deduction amount for 2005 may be reduced if you make more than $145,950. That amount applies to both single and married joint filers. The earnings limit is $72,975 each for a husband and wife who decide to file separately.

MyDollar: One Year

Today is the First birthday of MyDollar.

We thank all of our readers for their support in this year long journey. We hope we'll be able to serve quality information to our readers in years to come.

Competition: Savings Rate

If you have some cash that you donot want to invest in stock or bond, this is a good time for you because a competition among banks is brewing up to catch the attention of your cash at hand.

HSBC bank has boosted the current APY to 4.80% for all existing and newly opened savings accounts. The rate would be valid until April 30th and then will come back to its usual rate which, until last week was at 4.25%. The minimum deposit is only $1.

As our readers will remember, last month ING Direct bank made a similar announcement calling it 'Winter Save Up Sale' that earns you 4.75% APY on new deposits to the bank's Orange Savings Account. This interest rate would be offered to all new Orange Savings Accounts opened by new ING Direct customers or to all existing Orange Savings Accounts belonging to current customers. The interest rate would be valid for any amount (no minimum) deposited any time until April 15, 2006 – the Sale Period. After April 15, 2006, all the money in your account will earn the current APY at that time [at present which is 3.80% for old deposits if you had account in that bank].

We feel this is a good way to put your money to work with lucrative rates and enjoy high yield and security of your cash, while always getting access to it. Here are some more banks offering more options for you:

PayPal.com money market account currently has a yield of 4.38% with no minimum (not FDIC insured though). But remember starting March 1, Paypal will start taking out a 0.25% management charges out of the fund and the yield at that time would reduce by the same percentage.
Last week Emigrant-Direct's rate (which was leading until recently) for savings account also was increased to 4.25% with no minimum.
MyBankingDirect is giving 4.30% in Money Market Account with minimum deposit of $5000.
MetLife is giving 4.00% in its Money Market Account with minimum deposit of $25000.
AmboyDirect is probably trying to give high interest but its conditions (e.g., initial $5000 earn no interest, etc) are so complicated and confusing that we felt it's better to avoid it. If you wish to try to understand what they are trying to say, please check it yourself.
[Note: MyDollar has no connection whatsoever with the above-mentioned banks. We are giving such information only because we think this would be useful to our readers]

Changes in Credit Cards

Recently a number of credit cards have started changing their card holder agreement mostly for hiking their interest rates and for binding their customers into stricter laws. When you apply for a credit card, the contract that binds you as the card holder to pay as agreed also binds the issuer of the card to the original terms of the contract.

However, many of us never notice that there's a clause in most card holder agreements called "universal default" which allows the bank to change the rules midway unless you disagree. If you disagree to new terms and conditions, the bank then gets the right to close your account. On the other hand, you have the right to pay off the remaining balance under the terms of the original agreement.

After you receive a notification from the bank regarding such revisions, you must respond in writing within 30 days. You may simply let the bank know that you wish to continue under your original card holder agreement and continue to pay accordingly. You cannot, of course, use the card anymore because the account will be closed. But that is good. You will not add anymore to your debt in a card which is increasing its interest rate.